Companies incur risks in many forms, and they must bear these risks as an inherent cost of doing business. Companies frequently purchase insurance to mitigate losses due to risks such as property damage or legal liability. Merely because the risks are inherent, however, does not mean that they are uncontrollable. Businesses frequently employ risk management principles to minimize risk exposure. Risk management is the practice of identifying, measuring, and redistributing or reallocating risk in order to make risk less costly.
Certain weather-related events present one type of business risk. Risk arises when future events or outcomes are uncertain, and the weather is frequently uncertain and difficult to predict. The weather can have significant effects on business. Storms, lightening, hail, high winds, icy conditions, flooding, and other severe weather can force a business to shut down until normal weather conditions return. Severe weather can interrupt supply lines, shipping, and communications. It can prevent employees from coming to or returning from their places of employment; it can prevent customers from coming to a place of business for conducting transactions. Severe weather can have effects on power utilization levels and energy demands. It can necessitate the complete evacuation of large geographical areas. It can damage physical structures, property, and material assets.
Severe weather can cause expensive damage and destruction if it arrives without warning sufficient for a business to take appropriate precautions. Various governmental and commercial organizations provide general weather prediction services in an attempt to minimize the number of unwarned weather events, thus allowing businesses time to prepare for the strike of severe weather.
Inaccurate or overly general weather prediction services, however, can impose costs of their own. The mere warning of severe weather can cause businesses to take weather precautions, such as shutting down, retaining employees past their normal work hours, rerouting supplies or shipments, working on a skeleton crew, or other measures designed to mitigate or avoid the damage caused by severe weather. The decision to shut down an assembly line in the face of a tornado warning can cost thousands of dollars for each minute of factory inactivity. A utility's decision to mobilize response forces to react to anticipated power outages can be equally expensive. If severe weather does not strike, these costs of precaution are wasted.
The National Weather Service, a division of the National Oceanic and Atmospheric Administration, provides weather forecasts and severe weather warnings for the United States. These forecasts and warning systems, however, are not designed to meet the specific risk management needs of business and industry. For example, severe weather warnings are typically issued for much wider geographic areas and for longer durations than is appropriate for business purposes. Tornado, flash flood, and thunderstorm warnings, for example, are issued by county, even though only a small part of a particular county may be in danger. This results in the issuance of general warnings that are unlikely to correspond to actual severe weather for some locations, and can cause businesses to take unnecessary weather precautions. A weather forecasting and severe weather warning service that is tailored to meet the risk management needs of each business can reduce these unnecessary and wasteful costs.
Weather-related risk-management services typically cost money in the form of weather consulting fees, monitoring costs, and the like. For a business to know whether such services are worthwhile, it is necessary for them to compare the cost of one form of weather-related risk management with the costs of alternate forms of risk management. There is a need, therefore, for a method of calculating a return on investment for the use of weather-related risk-management services.